Last week, Stephen Miran, the Chairman of the Council of Economic Advisers, gave a speech at the Hudson Institute in which he explained that the U.S. deserved compensation for certain "global public goods" it provides to the world. In his opening remarks, he identified two such public goods:
Today I’d like to discuss the United States’ provision of what economists call “global public goods,” for the entire world. First, the United States provides a security umbrella which has created the greatest era of peace mankind has ever known. Second, the U.S. provides the dollar and Treasury securities, reserve assets which make possible the global trading and financial system which has supported the greatest era of prosperity mankind has ever known.
He then explained the costs to the U.S. of providing these public goods:
Both of these are costly to us to provide. On the defense side, our men and women in uniform take heroic risks to make our nation and the world safer, preserving our liberties generation after generation. And we tax hardworking Americans mightily to finance global security. On the financial side, the reserve function of the dollar has caused persistent currency distortions and contributed, along with other countries’ unfair barriers to trade, to unsustainable trade deficits. These trade deficits have decimated our manufacturing sector and many working-class families and their communities, to facilitate non-Americans trading with each other.
Focusing on the financial side, he elaborated on how "our financial dominance comes at a cost":
While it is true that demand for dollars has kept our borrowing rates low, it has also kept currency markets distorted. This process has placed undue burdens on our firms and workers, making their products and labor uncompetitive on the global stage, and forcing a decline of our manufacturing workforce by over a third since its peak and a reduction in our share of world manufacturing production of 40%.
At this point, given the high costs he laid out, you might think he would be making the case for the U.S. to stop providing these public goods. But instead, he wants the U.S. to keep doing it but get more compensation from others:
President Trump has made it clear that he will no longer stand for other nations free-riding on our blood, sweat, and tears, whether in national security or trade. ...
...
In my view, to continue providing these twin global public goods, there needs to be improved burden-sharing at the global level. If other nations want to benefit from the U.S. geopolitical and financial umbrella, then they need to pull their weight, and pay their fair share. ...
The best outcome is one in which America continues to create global peace and prosperity and remain the reserve provider, and other countries not only participate in reaping the benefits, but they also participate in bearing the costs. By improving burden sharing, we can enhance resilience, and preserve the global security and trading systems for many decades into the future.
Let me stop with the quotes for a moment and talk about some of what he has said so far.
Are the U.S. security umbrella and financial umbrella best described as "global public goods"? Or could they also be thought of as "policies that the U.S. government sees as being to its advantage and wants to continue doing"? I'm not totally sure about the right characterization, and I think opinions vary considerably around the world (and within the U.S. as well). There are a handful of countries that face specific security threats and thus have a strong desire for U.S. military support. But I think this is a minority, and in most countries opinions on these U.S. policies are pretty mixed. As a result, asking other countries to pay more for the U.S. to do these things may not be well received, as a fair number of people might prefer the U.S. stop doing them entirely.
I feel like the way the Trump administration is approaching this is to say: "These are some services we are providing, and you have to pay us what we think they are worth." But in terms of creating a stable international economic and security system, a better approach might be to ask: "Do you want us to provide these services? If so, let's talk about how the costs should be allocated." Because as things stand now, it comes across to many as if the U.S. government is doing something it believes is in its interest, and then asking for compensation.
Getting back to his remarks, he provides the following examples of the burden sharing he would like to see:
What forms can that burden sharing take? There are many options, here are a few ideas:
- First, other countries can accept tariffs on their exports to the United States without retaliation, providing revenue to the U.S. Treasury to finance public goods provision. Critically, retaliation will exacerbate rather than improve the distribution of burdens and make it even more difficult for us to finance global public goods.
- Second, they can stop unfair and harmful trading practices by opening their markets and buying more from America;
- Third, they can boost defense spending and procurement from the U.S., buying more U.S.-made goods, and taking strain off our servicemembers and creating jobs here;
- Fourth, they can invest in and install factories in America. They won’t face tariffs if they make their stuff in this country;
- Fifth, they could simply write checks to Treasury that help us finance global public goods.
I have several questions/comments here.
On the idea that other countries should accept U.S. tariffs without retaliation, it's important for people in the U.S. to understand that other countries have domestic politics too. Looking weak in the face of U.S. economic demands could hurt a foreign government's standing with its people, and that's not good for the future prospects of the leaders of that government.
As to the unfair and harmful trading practices, sure, it would be great to address those, but other countries are going to want to address similar U.S. practices (there are loads of these). That's how normal trade negotiations and agreements work.
On boosting defense spending for U.S. goods, some U.S. allies are feeling conflicted about that right now as a result of certain of the Trump administration's foreign policy moves.
And as to foreign investment in U.S. factories, with China being a big target of the U.S. tariffs, the question arises as to whether Chinese companies can build factories in the U.S. My sense is that Trump himself might be OK with that. I'm not so sure that most top officials in the administration (or many members of Congress) would agree though.
Miran also offered the following thoughts on tariffs and trade deficits:
One reason the economic consensus on tariffs is so wrong is because nearly all of the models that economists use to study international trade assume either no trade deficits at all, or assume that deficits are short-lived and quickly self-correct through currency adjustments. According to standard models, trade deficits will cause the dollar to weaken, which reduces imports and boosts exports, eventually wiping out the trade deficit. If that happens, tariffs may be unnecessary, because trade will balance itself over time and, in this view, intervening with tariffs can only make things worse.
However, that view is at odds with reality. The United States has run current account deficits now for five decades, and these have widened precipitously in recent years, going from about 2% of GDP in the first Trump Administration to a high of nearly 4% of GDP in the Biden Administration. And this has happened all while the dollar has appreciated, not depreciated!
The long run is here, and the models are wrong. One reason is that they fail to account for the U.S. provision of the global reserve currency. Reserve status matters and, because demand for the dollar has been insatiable, it has been too strong for international flows to balance, even over five decades.
My view is that there are two main reasons U.S. trade balances have not adjusted more during the longstanding period of U.S. trade deficits: (1) the relatively low U.S. savings rate, and (2) the role of the U.S. dollar as the reserve currency. He doesn't mention the first one, which I think is a big omission. On the second one, he makes clear that he wants the dollar to remain the reserve currency (during the Q & A, he said "dollar dominance is a great thing"), but it's clear that such a policy will limit the prospects for any adjustment taking place. Maybe he is saying that his "burden sharing" options can operate as an alternative way to reduce deficits, even with the dollar remaining as the reserve currency, but that has the problems noted above (among others). Or do they have in mind a plan to weaken the value of the dollar while keeping its role as the reserve currency? Would Trump be OK with that plan? I hope someone presses them on these questions.
